Some people say it's foolish to worry about soulless creatures overtaking the earth and devouring our brains.
I say they've already won.

Blog Credo

The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary.

H.L. Mencken

Wednesday, March 14, 2012

Your Moment In Keynes

The chart you are looking at compares changes in government spending under Reagan and Obama in their first terms in office.

Both men inherited soft economies that went south. But Reagan's soft economy was caused by extraordinarily high interest rates as Volcker and the Fed were crushing the inflation of the late '70s. The prime rate was over 20% at times during that crisis.

Still, but the third quarter of '82, Reagan was in the process of benefitting from a massive uptick in governmental spending. Most historically and economically literate people know that World War II ended the Depression. And what Reagan did was a massive military build-up (that had begun under Carter). That's Keynesian spending, folks.

And as the Fed relaxed interest rates, so to did the influx of government spending lead to the Reagan Boom.

Meanwhile, Obama has inherited a much uglier economic picture. Financial panics are nasty things with ugly fallout. The Federal Reserve has, I think, behaved brilliantly in this crisis and kept the economy from entering free fall.

But overall, government spending - that is to say planned deficit spending during a recession to stimulate demand is declining. It's worse in Europe, which is why Greece, Italy and Spain are in such trouble. But it's bad here, too. It's almost entirely the fault of the "Fifty Little Hoovers" in the statehouses around the country.

If it wasn't for the evisceration of government spending, we would be in a full bore recovery and unemployment would likely be around 7%.